Opinions - 15.03.2019 - 00:00 

Old-age provision: better this reform than no reform at all

The 2019 federal elections are characterised by uncertainties in the field of social security. Old-age provision (AHV), in particular, is a cause for concern. Martin Eling, Professor of Insurance Management at the HSG, looks at the discussion about the intergenerational contract.
Source: HSG Newsroom

15 March 2019. On 19 May, i.e. in the middle of the election year, the people will vote on the AHV/tax deal. Many commentators regard this as the most important popular ballot of 2019. The AHV /tax deal combines the reform of corporate tax with additional old-age provision monies. The additional funds are intended to be raised through an increase in the employer and employee contributions, on the one hand, and through an increase of the federal contribution towards the funding of the AHV, on the other hand.

Old-age provision in distress

This sounds rather technical and not particularly problematic. However, we must not disregard what great difficulties old-age provision is facing by now. Whereas the AHV still closed 2017 with a positive operating result thanks to enormously favourable developments in the capital market, 2018 was a genuine shock. The capital assets decreased by CHF 1.5bn; all in all, the AHV fund was even reduced by CHF 2.5bn – also because the expenses of the AHV were massively exceeding its revenue by then. Thus in 2019, CHF 125m will be drained off the AHV fund month after month. The gap between expenditure and revenues will become wider owing to the demographic developments and the continuing blockade of reforms in the field of social policy. The projections of the Federal Social Insurance Office predict that without compensatory measures, the AHV deficits will amount to CHF 4bn (per annum) in the mid-2020s and to CHF 7bn (per annum) at the end of the 2020s. In 2031, the AHV fund will then be completely depleted.

The pension scheme sector and thus the second pillar of our old-age provision is also suffering from current general conditions. Thus AXA Winterthur withdrew from the full insurance model of professional pensions – a decision which is easy to understand in terms of business policy but is fatal for Switzerland’s social security system. Obviously, politics is incapable of turning the adjustment screws in such a way as to make it possible for a broadly based old-age provision to be combined with a collectively run investment risk. Our permanently highly praised "three-pillar system" of old-age provision is thus up for discussion, at least to a certain extent.

Pension insurance in Germany

A glimpse across the border helps us to put the situation in Switzerland into perspective. Thus in Germany, the statutory pension level has been forecast to decrease to 42% by 2045. This means that an average pension is distinctly less than half of a pensioner’s final salary. Switzerland is still aiming at a pension level of 60%, which is achievable. More than half of the OECD countries have adopted a pensionable ago of 67+, many of them with a significantly lower life expectancy than Switzerland. In this respect, Switzerland has disengaged itself from the discussion up to a point and is conducting a timid debate about equal pay and gender equality with regard to an increase in women’s pensionable age. Equal pay and gender equality are undoubtedly very important concerns, so let’s say men were to work until 67 and women until 66. Switzerland’s old-age provision system would be back on a sustainable basis again in one fell swoop.

Pensionable age: taboo issue in Switzerland

However, the pensionable age remains a taboo issue in Switzerland. If we accept this as it is, however, we will also have to conduct an open discussion about the consequences of this taboo, for any pension reform can only be carried out with the three adjustment screws "working longer", "paying more" (either through salary contributions or taxation) or "cutting pensions". Since "cutting pensions" is also hardly feasible, "paying more" is the only option left – which will be an increasing burden on the economy and on consumption. This is precisely what is happening now.

What, then, should our verdict be on the AHV/tax deal? There is no doubt that the combination of corporate tax reform and AHV funding is a bit of horse trading that yokes two different things together. And there is no doubt that there would be alternative reform paths such as a more courageous discussion about the pensionable age. But a bit of horse trading may well still be better than further delays in the reform process, which uses up billions at the expense of the younger generations year after year. As controversial as the AHV/tax deal has to be considered, it helps to correct the present imbalance and lop-sidedness in the direction of the older generation. A further discussion about the pensionable age and a systemic reform of old-age provision, however, will remain indispensable in any case.

Prof. Dr. Martin Eling is Director of the Institute of Insurance Economics at the University of St.Gallen.

Photo: Adobe Stock / nadezhda1906